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Is the Instagram effect causing Silicon Valley to fund the wrong companies?

There’s a lot of talk in Silicon Valley about a bubble in VC investing right now, with the $1 billion purchase of Instagram by Facebook(s fb) for some people being emblematic of high valuations for social apps without a clear revenue stream or inherently altruistic purpose. So many are wondering: could the tech industry shift toward more investment in startups that cure cancer or find solutions for clean energy? The answer depends on whom you ask.

A panel of investors and startup founders speaking at Venture Shift on Thursday debated whether there really is a bubble in venture capital right now, and whether the talent and money in the startup area is directed at solving the most important problems.

Marcus Ogawa, a managing partner at Quest, said Instagram’s sale will absolutely inspire a proliferation of photo and video-sharing apps, perhaps more than most customers really need.

“It’s a complete and total waste of money. But I don’t want to live in a planned economy,” he said, pointing out the incredible amount of innovation and development that comes from the growth of those companies.

There’s certainly plenty of money going in that direction right now. A report from CB Insights this week found that the most recent quarter saw $8.1 billion in venture capital financing for 812 companies, the highest in both dollar amount and number of deals since the same quarter of 2001. And of that funding, 13 percent of deals were in the mobile sector, with 30 percent of those companies involved in photo or video technology.

So are there more meaningful companies that aren’t getting funded because of the so-called Instagram effect?

“You see people graduating from top tech schools… and they’re starting companies in internet and mobile,” said Corey Reese, CEO and co-founder at Ness Computing. “They’re not starting companies to enhance the life expectancy, by and large.”

But Jessica Alter, founder of the startup Founder Dating, pointed out that one of the reasons so many social consumers apps are getting funded is that the costs associated with starting them are much lower. Cloud technology and open-source code have made it cheaper to start and launch those businesses, making them some of the more visible success stories compared to companies in the biotech or clean energy spheres, even if accelerator and incubator programs for health care startups do exist.

“It’s all going down, but nothing’s going down as much as the cost of starting a new consumer app,” she said.

10 Responses to “Is the Instagram effect causing Silicon Valley to fund the wrong companies?”

  1. Arthur Huynh

    It’s an excellent idea to always be skeptical of current silicon valley trends! I’m working with Orange France who will be hosting an event in SF (September 17) covering the topic of innovation & trends in the Silicon Valley. Guest bloggers from Europe have been invited who will also share their insights with top innovators from around the valley.

    It’s free to attend and I think fellow bloggers may find it interesting. Email me if you’d like to know more! arthurh(at)

  2. There have been strong arguments on both sides of whether or not the Instagram buyout by Facebook was a smart business move or not. Both companies have had their successes, and joining together can only lead to greater accomplishments. I’m sure there are companies out there that are attempting to develop similar photo and video sharing apps, but what some don’t realize is that what happened with Instagram will not happen to every other company.

    The point about more “meaningful” companies not getting funded is interesting. Many of today’s successful businesses are at the top because they are consumer-targeted and widely accepted. Companies that are not funded may simply need to change how they are marketed, and that might make all the difference.

  3. twospruces

    Making money and improving the way we live are independent motivations. Why ask that question now? VCs have been chasing crap to make money since the dawn of time. I reiterate the need for “national turn off the electronics day”.

  4. “They’re not starting companies to enhance the life expectancy, by and large.”
    Someone’s quality of life could rise from an app like Instagram. It could therefore enhance someone’s life expectancy. Just saying.